Patent reform: Is this the year?

Many people are optimistic that 2007 will be the year of patent reform. And the prospects do look favorable, with identical bills being introduced into the House (H.R. 1908) and Senate (S.1145) and associated bipartisan support.

The topic of patent reform has long pitted the pharmaceutical/biotech industry against the high-tech sector. Starkly different business dynamics are largely to blame for this disconnect. Polar-opposite perspectives on injunctions are understandable when one considers that the typical life cycle for a drug is in excess of 10 years and that for an electronic device is less than a year. As well, one patent may apply to a specific drug, whereas thousands of patents apply to an average cell phone, making the impact of licensing and litigation settlements very different on each party's bottom line. Since the Supreme Court provided added certainty over injunctions last year with the four-step test outlined in the eBay decision, a fundamental roadblock for patent reform has been removed. Indeed, injunctions are not part of the current legislative proposal, and many people are optimistic that 2007 will be the year of patent reform. And the prospects do look favorable, with identical bills being introduced into the House (H.R. 1908) and Senate (S.1145) and associated bipartisan support.

However, patent reform efforts have started strong and fizzled out several times over the past decade, most recently with the Patent Reform Act of 2005. Meanwhile, patent fights have threatened to cripple many of the world's largest technology companies (Microsoft, RIM, Apple, et al.) and have stifled innovation and risk-taking. The root cause of much of this is poor patent quality, combined with limited recourse to challenge patent validity and litigation abuses. These issues, along with the emergence of the "nonpracticing entity" or "patent troll" business model, have created the perfect storm for the technology industry. All things being equal, the upfront cost and distraction to fight a questionable claim of infringement is greater than the cost to settle  and trolls know the "settlement line." As well, the Supreme Court's recent decision to overrule the obviousness test in KSR v. Teleflex has the potential to inject even more uncertainty and risk into the mix. It is far more likely that it will be the courts that try to sort out the obviousness question over the next two to four years than any legislative reform.

In essence, poor-quality patents have become a "tax" on doing business and on innovation. At the same time, PTOs are flooded with nuisance filings and the courts with nuisance cases. Technology companies with inventions to protect face PTO backlogs well in excess of four years, often longer than the product life cycle for the technology in question. As well, public technology companies can become embroiled in cases that drag on for years, adding undue risk and uncertainty for clients, investors and employees alike. In an established technology company, an "if it ain't broke, don't fix it" mentality may start to emerge. New innovations and new technologies that are able to supplant older ones bring undue business risk and uncertainty. Over time, this will stifle domestic innovation and make U.S. companies even more susceptible to offshore competition.